Deutsche Telekom Stock Is a Cheap Play on T-Mobile’s Dominance

The launch of Deutsche Telekom’s 5G network in Dusseldorf in June.


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An alternative way for investors to play



T-Mobile
’s

growth and future buyback program is via shares of its largest stakeholder,



Deutsche Telekom
.

Europe’s leading telecom operator by revenue traces its roots to a German state-owned business privatized in 1995. It has had a presence in the U.S. market since 2001, and operates in about a dozen other European countries outside of Germany.

Deutsche Telekom’s (ticker: DTE.Germany) American depositary receipts trade over the counter in the U.S. securities market under the ticker DTEGY.

The pitch for the stock is simple: When backing out the value of DT’s stake in



T-Mobile US

(TMUS), worth some $90 billion at current market levels, the remaining European telecom business is dirt cheap—just $4 billion. And there’s room for improvement there as the company pays down debt and potentially turns cash flow toward a higher dividend.

New Street’s James Ratzer, who leads the research firm’s European Communication Services team, estimates that DT’s stock should be worth about 25 euros ($24.93) per share by the sum of its parts, versus the stock’s recent €18.75. If T-Mobile stock rises to New Street’s price target, the value of DT shares would balloon to €30, per Ratzer’s math.

The catalyst for closing the gap may be DT reaching its debt-paydown target and hiking its dividend payout. The stock currently yields about 3.4% annually, versus the sector average of more than 5%, according to Ratzer. A dividend announcement could come in November, based on past years.

DT stock provides the potential for investors to ride T-Mobile’s growth and buyback in the U.S. while also getting an undervalued European telecom with the potential for dividend income growth.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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